Tax court rejects tax credit claimed on purported scientific research expenditures

The government correctly assessed taxes concerning a company’s expenditures for a dual-purpose solar shingle project, which did not pertain to scientific research and experimental development as claimed by the company, the Tax Court of Canada ruled.

In Logix Data Products Inc. v. The Queen, 2021 TCC 36, the issue was whether the respondent rightly assessed expenditures incurred by the appellant information technology services company in the taxation year ending on June 30, 2013. The appellant was trying to claim the expenditures as scientific research and experimental development (SRED) under s. 248(1) of the Income Tax Act, RSC 1985, c 1 (5th Supp), allegedly entitled to investment tax credits.

These expenditures related to the appellant’s project to develop solar shingles, which served as both a power source and regular roof shingles. These shingles would allow the building to look like a conventional roof for aesthetic purposes instead of a roof equipped with utility-grade solar panels.

The Tax Court of Canada dismissed the appeal, ruling that the appellant failed to show that the expenditures of the solar shingle project were for SRED. The court applied the criteria in CW Agencies Inc. v. Canada, 2001 FCA 393 for that determination.

Regarding the criterion of technological uncertainty, the court said that the appellant failed to establish on a balance of probabilities that its activities addressed technological uncertainties or novel problems requiring knowledge of something more than the known mechanical or electrical engineering principles. The appellant also did not show that it had enough information about the state of relevant knowledge in the field, the court said.

The court found that the appellant’s solar shingles research simply made general statements comparing solar panels and solar shingles but failed to cite sources of information. The appellant also failed to consult those knowledgeable in solar energy, mechanical engineering, electrical engineering and solar panel production and installation to determine the existence of technological uncertainties, other than an Italy-based company that manufactured solar panels but not solar panel shingles.

The court discussed and rejected each of the technological uncertainties that the appellant suggested its solar shingle project was addressing.

The court also ruled that the appellant presented testimonial and documentary evidence that was inadequate, unreliable and not contemporaneous. The evidence also failed to mention a scientific or systematic approach to solving the problems. The appellant’s test description documents lacked details such as hypotheses, observations, conclusions, or the test’s purpose. The test results summaries also lacked timesheets or records describing the shingles that were the subject of each test.